7th Circuit affirms ruling for tech company in employment fraud case

(IL file photo)

A woman who sued her ex-employer for fraud after her position was eliminated the day she started work cannot add a new fraud claim to her amended complaint, the 7th Circuit Court of Appeals has affirmed.

Defendant-appellee HC1.com is a technology company that provides cloud-based software to clients in the health care industry.

According to court records, as part of efforts to grow its customer base in late 2017, HC1 created an account executive position focused on the post-acute care market.

HC1 interviewed Rachael Schmees for the position in early October 2017. During the interview, the chief operating officer told Schmees that the company’s finances were secure and that it was in “an ideal position for [Schmees] to thrive.”

HC1 offered Schmees the job, and she immediately accepted.

Schmees’s offer letter included a provision that made her employment contingent on her subsequent signing of an employee confidentiality and nonsolicitation agreement. She signed the agreement two days after she started work with the company, which was Dec. 11.

Schmees’s first week at HC1 was also her last.

By the time she had started, the company was already facing troubles in the post-acute care market. On Dec. 8, members of HC1’s board of directors had begun discussing the company’s response, including cutting expenses and raising additional capital. Three days later, the board voted to eliminate the recently created post-acute care positions, including Schmees’.

A week later, HC1 informed Schmees that the company had eliminated her position and terminated her employment.

Schmees sued HC1, alleging fraud, fraudulent inducement, promissory estoppel and intentional infliction of emotional distress.

The first amended complaint alleged HC1 knew that her position would be eliminated by Dec. 8. It also stated that the company’s chief operating officer made false statements during her October 2017 interview — specifically, that the company was in excellent financial condition and had a job for her to thrive in — that had fraudulently induced Schmees to resign from her former employer.

But the first amended complaint contained no mention of reliance on the employment agreement or the fact that HC1 eliminated her position before she signed the agreement.

The United States District Court for the Southern District of Indiana denied HC1’s motion to dismiss Schmees’ fraud and fraudulent inducement claims.

In the same order, the district court denied Schmees’ motion to file a second amended complaint as moot. Schmees had argued that the amendment only added new facts in support of the first amended complaint’s claims.

The court gave Schmees 30 days to refile a motion seeking leave to amend. She did not refile.

Following discovery, HC1 moved for summary judgment on the remaining fraud claims.

Schmees’ response opposing HC1’s motion for summary judgment argued that when HC1 gave her the employment agreement and asked her to enter into it on Dec. 13, HC1 committed fraud because it had already eliminated the position.

Schmees conceded that her conduct-based fraud claim was a new claim but asked the district court to amend her pleadings at summary judgment. The district court declined and granted summary judgment for HC1.

In its ruling, the district court concluded that the new fraud claim based on the presentation of the employment agreement was beyond the scope of the complaint, and that Schmees’ renewed attempt to amend the complaint by a footnote in her summary judgment brief came too late.

Schmees appealed, arguing the district court abused its discretion by concluding that her motion for leave to file a second amended complaint was moot. She also contested the district court’s determination that her new conduct-based fraud claim, asserted for the first time at summary judgment, was beyond the scope of her complaint.

The 7^th Circuit disagreed, finding the district court did not abuse its discretion in making either ruling.

Judge Thomas Kirsch wrote the opinion for the appellate court.

According to Kirsch, Schmees argued that the district court’s failure to provide a justification for the denial to amend her pleadings was an abuse of discretion.

However, Kirsch noted that the district court denied the motion as “moot” for reasons that are apparent from the record.

After the district judge concluded that the first amended complaint sufficiently stated claims for fraud, the additional factual allegations became superfluous, Kirsch wrote.

“At that point, the claim was moving forward with or without the new allegations, so the district court did not abuse its discretion in denying the motion to amend as moot,” he said. “Schmees also cannot show any prejudice because the court permitted her to renew the motion, but she declined to do so.”

Further, Schmees first offered the facts to support her new claim in her proposed second amended complaint — the one the district court denied as unnecessary, Kirsch noted.

When it did so, the district court granted Schmees 30 days to explain why the second amendment was necessary. She declined the invitation.

“Having rejected the opportunity to properly add the factual underpinnings for the new claim, justice did not require that Schmees be allowed to smuggle it into the case through her summary judgment briefing,” he concluded.

Senior Judge Diane Wood and Judge Amy St. Eve concurred in Rachael Schmees, formerly known as Rachael Black v. HC1.com, Inc., 22-1214.